Can a New York City Industrial Development Agency sale-leaseback structure let PaineWebber buy and lease office build-out improvements and equipment sales-tax-free by having its agents purchase everything on the IDA's behalf?

Plain-English summary

To induce PaineWebber Group, Inc. ("PWG") and its brokerage subsidiary PaineWebber Incorporated ("PWI") to keep their headquarters in New York City, the New York City Industrial Development Agency (the "IDA") proposed a multi-layered sale-leaseback "Project." PWI leases office space at 1285 and 1251 Avenue of the Americas (and other City locations); a separate PWG subsidiary called Maiden Lane Leasing Corp. would purchase and install office build-out work ("Tenant Improvements" -- everything from HVAC and electrical systems to security systems and floor coverings) and buy or lease furniture, computer hardware, and prewritten software ("Project Personalty"), each time acting as the IDA's disclosed agent rather than in its own name. PWI would sublease the office space (without the improvements) to the IDA, which would then hold title to or a leasehold interest in the Tenant Improvements and Project Personalty, financed by tax-exempt IDA bonds that PWG itself would purchase. The IDA would lease everything back to Maiden Lane (the "Financing Lease"), which would sublease it back to the IDA, which would finally lease it out to PWI and its affiliates for actual use (the "Operating Lease") -- with maintenance contracts (repairs and replacement parts, but not janitorial services) layered on top and eventually reassigned to whoever's actually using the property. At the end of the arrangement in 2015, everything reverts to Maiden Lane for free. PWG asked the Department to confirm the sales-and-use-tax treatment of every payment layer in this structure.

The Department largely blessed the plan, relying on two earlier Wegmans Food Markets court decisions distinguishing an IDA's legitimate financing/ownership role from disqualified "operating a business" activity. Purchases of materials and equipment: as long as Maiden Lane, PWG, PWI, or a designated affiliate is the IDA's clearly disclosed agent on every invoice and contract -- and the IDA is the actual owner, lessor, or lessee of record -- purchases of Tenant Improvements that qualify as capital improvements are exempt outright, and purchases of Tenant Improvements that don't qualify as capital improvements are exempt only through the disclosed-agency mechanism (not automatically). The same disclosed-agency rule covers all Project Personalty, including the prewritten computer software. Lease payments up and down the chain -- IDA to Maiden Lane and back, and IDA to PWI/affiliates under the Operating Lease -- are all exempt from state, City, and MCTD sales and use tax, since the IDA itself (a tax-exempt public corporation) is on both sides of each transaction. Maintenance contracts are exempt too, but with real limits: exemption only reaches parts and services genuinely needed to maintain, repair, install, or service the Project Personalty or preserve the structural integrity of the Tenant Improvements, while parts and materials that get consumed in ordinary operation (the ruling's own example: a toner cartridge) stay taxable, as do fuel, energy, and utility charges and any janitorial-type general services -- echoing the earlier Wegmans holding that ordinary operating expenses never ride along with an IDA's tax exemption just because the underlying property was IDA-financed.

What this means for you

Companies negotiating an IDA-financed sale-leaseback for office space or equipment

The exemption isn't automatic just because an IDA is nominally involved -- every purchase invoice, lease, and maintenance contract must actually show the IDA as owner/lessor/lessee of record, and your designated purchasing entity must be an explicitly disclosed agent of the IDA on every document. Sloppy paperwork that doesn't name the IDA can cost the exemption on that specific purchase.

Businesses structuring multi-entity leaseback chains (agent, financing lease, operating lease)

Each leg of a genuine IDA lease-back chain (IDA-to-financing-agent, agent-back-to-IDA, IDA-to-end-user) can independently qualify as exempt, but the structure has to mirror an actual public-benefit financing arrangement -- not merely route ordinary business operations through an IDA shell, which is exactly what the Wegmans cases rejected.

Anyone drafting or reviewing IDA maintenance contracts

Segregate consumed parts/materials, fuel/utilities, and general/janitorial services from genuine repair-and-maintenance charges on Tenant Improvements or Project Personalty -- only the latter category rides along with the IDA exemption, and an undifferentiated lump-sum charge risks losing the exemption on the whole bill.

Common questions

Q: Does routing a purchase through an IDA automatically make it tax-exempt?
A: No -- the IDA must actually be the disclosed owner, lessor, or lessee of record on the purchase invoices, statements, and contracts, and the purchasing entity must be its clearly disclosed agent. Missing that documentation defeats the exemption on that purchase.

Q: Are all maintenance and repair charges under an IDA project exempt?
A: Only the portion genuinely needed to maintain, service, install, or repair qualifying equipment or preserve a Tenant Improvement's structural integrity. Consumed parts/materials, fuel, energy, utilities, and general services like janitorial work stay taxable, and an unsegregated combined charge can make the whole bill taxable.

Q: Can an IDA structure be used to avoid tax on ordinary business operating costs?
A: No -- the Wegmans decisions this opinion relies on specifically rejected using an IDA's tax exemption to cover routine operating expenses (utilities, window washing, etc.) that have nothing to do with the IDA's financing/ownership role.

Q: Does this ruling apply to my company's IDA project?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else -- and even for PaineWebber, the exemption depends on the actual documents matching the structure described here exactly.

Citations and references

• Tax Law § 1101(b)(5) (sale/purchase); § 1101(b)(6) (tangible personal property, prewritten software); § 1101(b)(9) (capital improvement); § 1101(b)(14) (prewritten software defined)
• Tax Law § 1105(a), (c)(3), (c)(5) (TPP, installation/repair, real property maintenance); § 1107(a), § 1109(a) (NYC and MCTD additional taxes); § 1110 (use tax)
• Tax Law § 1115(a)(28) (intercompany custom software exemption); § 1115(o) (software services exemption)
• Tax Law § 1116(a)(1) (State/agency/public corporation exemption)
• 20 NYCRR § 526.6(c) (resale exclusion); § 526.7(a), (c)(2) (sale/lease, lease-option); § 526.8(c) (real property exclusion); § 529.2(a) (public corporations); § 541.3(a) (governmental contractor proof)
• General Municipal Law § 858 (IDA powers); § 862(2) (one-third retail facilities cap); § 874(1), (2) (IDA tax exemption); § 917 (NYC IDA)
• Wegmans Food Markets v. Department of Taxation and Finance, 126 Misc.2d 144, aff'd 115 AD2d 962, lv to app den 67 NY2d 606 ("Wegmans I")
• Wegmans Food Markets v. Department of Taxation and Finance of the State of N.Y., Sup Ct, Monroe County, Jan. 10, 1992, Galloway, J. ("Wegmans II")

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_33s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(33)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S961008B

On October 8, 1996, a Petition for Advisory Opinion was received from
PaineWebber Group, Inc., 1285 Avenue of the Americas, 16th Floor, New York, New
York 10019-6093.
Petitioner, PaineWebber Group, Inc., (hereinafter "PWG") states the issues
and facts as follows (the underlined terms below are defined in the statement of
facts):
a. Whether the purchase, lease and installation of "Tenant Improvements"
and the purchase and lease of the "Project Personalty" by "Maiden Lane", "PWG",
"PWI" or any "Affiliate" of "PWG" designated by the IDA as an agent for the IDA,
in each case as agent for and on behalf of the IDA, are exempt from New York
State and New York City Sales and Use Tax.
b. Whether payments under the leases of the "Tenant Improvements" and
"Project Personalty" from the IDA to "Maiden Lane", and from "Maiden Lane" back
to the IDA, are exempt from New York State and New York City Sales and Use Tax.
c. Whether payments by "PWI" and its "Affiliates" to the IDA under the
"Operating Lease" of "Tenant Improvements" and "Project Personalty" from the IDA
to "PWI" and its "Affiliates" are exempt from New York State and New York City
Sales and Use Tax.
d. Whether payments made under the "Maintenance Contracts" by "Maiden
Lane", "PWG" or "PWI", in each case as agent for and on behalf of the IDA, are
exempt from New York State and New York City Sales and Use Tax.
e.
Whether payments by "Maiden Lane" to the IDA under the "Financing
Lease" of the "Tenant Improvements" and "Project Personalty" from the IDA to
"Maiden Lane", and from "Maiden Lane" back to the IDA, to the extent allocable
to the services provided under the "Maintenance Contracts", are exempt from New
York State and New York City Sales and Use Tax.
f. Whether the payments by "PWI" and its "Affiliates" to the IDA under the
"Operating Lease" of the "Tenant Improvements" and "Project Personalty" from the
IDA to "PWI" and its "Affiliates", to the extent allocable to the services under
the "Maintenance Contracts", are exempt from New York State and New York City
Sales and Use Tax.
This petition for advisory opinion concerns a proposed transaction (the
"Project") between the New York City Industrial Development Agency (the "IDA"),
"PWG" and its wholly-owned subsidiary, PaineWebber Incorporated ("PWI") intended
to induce "PWG" and "PWI" to maintain their offices in The City of New York (the
"City"). In a resolution adopted May 14, 1996 (the "Resolution"), the "IDA"

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determined that the "Project" will promote, is authorized by and will be in
furtherance of the policy of New York State, as set forth in the New York State
Industrial Development Agency Act.
"PWI" leases office space in the City at 1285 Avenue of the Americas and
1251 Avenue of the Americas (collectively, together with any other additional or
substitute locations that may be approved by the IDA, the "Project Premises").
"PWI" also leases space at various other locations throughout the City
(collectively, the "Other Locations").
For securities industry regulatory reasons, another wholly-owned subsidiary
of "PWG", Maiden Lane Leasing Corp. ("Maiden Lane") (rather than "PWI") generally
will purchase, lease and install in connection therewith, and will enter into
maintenance, service, installation and repair contracts with respect to, as
applicable, in each case as agent for and on behalf of the IDA, (i) leasehold
improvements in the "Project Premises", and (ii) machinery, equipment,
furnishings and other items of personal property for use by "PWG", "PWI" and
other affiliates of "PWI" and "PWG" (collectively, "Affiliates"), both in the
"Project Premises" and at the "Other Locations". Currently, "Maiden Lane" leases
certain leasehold improvements and personal property to "PWI" and "Affiliates"
pursuant to the terms of an "Operating Lease".
In order to make available the benefits offered by the City, the IDA, "PWI"
and "PWG" have tentatively agreed to the following structure:
A project agreement ("Project Agreement") among the IDA, "PWG", "PWI" and
"Maiden Lane" will provide that "Maiden Lane", "PWG", "PWI" or any "Affiliate"
of "PWG" designated by the IDA as an agent for the IDA, will, in each case as
agent for and on behalf of the IDA, (a) purchase and install construction
materials and tangible personal property to be used to make capital improvements
at the "Project Premises" (such capital improvements, together with replacements,
enhancements and additions thereto, collectively, the "Tenant Improvements") and
(b) purchase or lease machinery and equipment, furniture, fixtures and other
tangible personal property having a useful life of more than one year (such
personal property, whether used in the "Project Premises" or in any of the "Other
Locations", and together with any replacements, enhancements and additions
thereto, collectively, the "Project Personalty"). (Any equipment lease entered
into by "Maiden Lane" as agent for and on behalf of the IDA will be a capital
lease for purposes of Financial Accounting Standard No. 13 ("FAS 13") and will
not constitute an "Operating Lease" as defined in FAS 13 unless such lease
contains a purchase option.) The "Project Agreement" will also provide that
"PWI", "PWG" or "Maiden Lane", in each case as agent for and on behalf of the
IDA, may enter into qualified contracts for the maintenance of the "Tenant
Improvements" and the "Project Personalty", including the replacement of parts
(other than parts consumed in the ordinary operation thereof) and the making of
repairs, but excluding janitorial services ("Maintenance Contracts").
The "Tenant Improvements" and "Project Personalty" will include, without
limitation, the following items and any replacements, enhancements and additions
to the following items: machinery, equipment, furniture, furnishings, fixtures
and other property, heating, lighting, electrical and mechanical systems,
heating, ventilation and air conditioning systems, computer hardware, graphics

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systems, telephone systems, window and floor treatment (window curtains and the
like, and floor coverings), security systems, audio visual equipment, and
sprinkler systems and other fire prevention and other extinguishing apparatus.
The "Project Personalty" also will specifically include tangible personal
property in the form of pre-written computer software, not limited as to any of
the following: (i) the medium by means of which the software is conveyed to the
purchaser (including both tangible and intangible means); (ii) the kind of
equipment for which acquired (including both computers and related equipment);
and (iii) whether or not such software is used on equipment in which the IDA has
an interest (such computer software, as not so limited, including any
replacements, enhancements and upgrades pursuant to "Maintenance Contracts" and
additions thereto, collectively, "Computer Software").
In order for the IDA to have a leasehold interest in the real property on
or in which the "Tenant Improvements" will be made, "PWI" will sublease the
"Project Premises" (without the "Tenant Improvements") to the IDA, and the IDA
will sub-sublease the "Project Premises" (other than the "Tenant Improvements")
back to "PWI" (this sub-sublease from the IDA to "PWI" being hereinafter referred
to as the "Premises Lease").
The IDA will issue bonds from time to time (referred to herein as "Bonds"),
to be purchased by "PWG" or by an eligible affiliate of "PWG", to finance the
purchases and leases of "Tenant Improvements" and "Project Personalty".
During the term of the "Project", the IDA will hold title to, or a
leasehold or license interest in, the "Tenant Improvements" and the "Project
Personalty" and will lease such interest to "Maiden Lane" (such lease being
referred to herein as the "Financing Lease"), in each case solely for re-lease
by "Maiden Lane" to the IDA. The "Financing Lease" will provide that "Maiden
Lane" or its designee will be entitled to the services to be provided under the
"Maintenance Contracts" and that "Maiden Lane" or its designee will be obligated
to pay, as agent for and on behalf of the IDA, all amounts due under the
"Maintenance Contracts".
Rents paid by "Maiden Lane" to the IDA under the
"Financing Lease" will be in an amount equal to the principal and interest due
on the Bonds, i.e., in an amount sufficient to repay the Bonds.
"Maiden Lane" will sublease such "Tenant Improvements" and the "Project
Personalty" to the IDA, and, lastly, the IDA will sub-sublease such "Tenant
Improvements" and the "Project Personalty" under a master leaseback to "PWI" and
its "Affiliates", who will be the users of such "Tenant Improvements" and
"Project Personalty" (such master lease by the IDA to "PWI" and its "Affiliates"
being referred to herein as the "Operating Lease"). "Maiden Lane" will not be
the user, in whole or in part, of any of such "Tenant Improvements" and "Project
Personalty" which it will lease from and to the IDA. The sublease from "Maiden
Lane" to the IDA, and the "Operating Lease", each will assign the benefits of the
"Maintenance Contracts", as applicable, to the users of the "Tenant Improvements"
and "Project Personalty" with respect to which the "Maintenance Contracts" apply.
If "PWI" relocates its headquarters outside the City, or if certain
specified reductions in the number of "PWI" employees in the City occur, "PWI"
may be required to make specified payments ("Recapture Payments") to the IDA,

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based in part on the amount of the exemptions from State and City Sale and Use
Taxes realized with respect to "Tenant Improvements" and "Project Personalty" to
the date of any such relocation or reductions.
At the conclusion of the "Project" (at the end of the year 2015), the Bonds
will mature and be paid off, the sublease of the "Project Premises" to the IDA
and the "Premises Lease", the "Financing Lease" and the "Operating Lease" will
terminate, and title to the "Project Personalty" and the "Tenant Improvements"
and all interests in the "Maintenance Contracts" will be reconveyed to "Maiden
Lane" without the payment of any consideration.
The "Project" will not exceed the allowable one-third retail facilities
restriction of Section 862 of the General Municipal Law.
Applicable Sales and Use Tax Law and Regulations
Section 1101(b)(5) of the Tax Law defines "sale, selling or purchase" as:
Any transfer of title or possession or both, exchange or barter,
rental, lease or license to use or consume (including, with respect
to computer software, merely the right to reproduce), conditional or
otherwise, in any manner by any means whatsoever for a
consideration, or any agreement therefor, including the rendering of
any service, taxable under this article, for a consideration or any
agreement therefor.
Section 1101(b)(6) of the Tax Law defines "tangible personal property" as:
Corporeal personal property of any nature.... Such term shall also
include pre-written computer software, whether sold as part of a
package, as a separate component, or otherwise, and regardless of
the medium by means of which such software is conveyed to a
purchaser. ...
Section 1101(b)(14) of the Tax Law defines "prewritten computer software"
as:
Computer software (including prewritten upgrades thereof) which is
not software designed and developed by the author or other creator
to the specifications of a specific purchaser. The combining of two
or more prewritten computer software programs or prewritten portions
thereof does not cause the combination to be to other than
prewritten computer software.
Prewritten software also includes
software designed and developed by the author or other creator to
the specifications of a specific purchaser when it is sold to a
person other than such purchaser.
Where a person modifies or
enhances computer software of which such person is not the author or
creator, such person shall be deemed to be the author or creator
only of such person's modifications or enhancements.
Prewritten
software or a prewritten portion thereof that is modified or
enhanced to any degree, where such modifications or enhancement is
designed and developed to the specifications of a specific

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purchaser, remains prewritten software; provided, however, that
where there is a reasonable, separately stated charge or an invoice
or other statement of the price given to the purchaser for such
modification or enhancement, such modification or enhancement shall
not constitute prewritten computer software.
Section 1105 of the Tax Law provides, in relevant part:
... there is hereby imposed and there shall be paid a tax of four
percent upon:
(a)
The receipts from every retail sale of tangible personal
property, except as otherwise provided in this article.
*

*

*

(c)
The receipts from every sale, except for resale, of the
following services:
*

*

*

(3)
Installing tangible personal property ... or maintaining,
servicing or repairing tangible personal property ... not held for
sale in the regular course of business, whether or not the services
are performed directly ... or by any other means, and whether or not
any tangible personal property is transferred in conjunction
therewith...
*

*

*

(5) Maintaining, servicing or repairing real property, property or
land, as such terms are defined in the real property tax law,
whether the services are performed in or outside of a building, as
distinguished from adding to or improving such real property,
property or land, by a capital improvement as such term ... is
defined in ... this chapter. ...
Section 1107(a) of the Tax Law provides, in relevant part:
On the first day of the first month following the month in which a
municipal assistance corporation is created under article ten of the
public authorities law for a city of one million or more, in
addition to the taxes imposed by sections eleven hundred five and
eleven hundred ten, there is hereby imposed ... within the
territorial limits of such city, and there shall be paid, additional
taxes, at the rate of four percent, which except as provided in
subdivision (b) of this section, shall be identical to the taxes
imposed by sections eleven hundred five and eleven hundred ten.
Such sections and the other sections of this article, including the
definition and exemption provisions, shall apply for purposes of the
taxes imposed by this section in the same manner and with the same

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force and effect as if the language of those sections had been
incorporated in full into this section and had expressly referred to
the taxes imposed by this section.
Section 1109(a) of the Tax Law provides, in relevant part:
In addition to the taxes imposed by sections eleven hundred five and
eleven hundred ten of this article, there is hereby imposed within
... the metropolitan commuter transportation district ... and there
shall be paid, additional taxes, at the rate of one-quarter of one
percent, which shall be identical to the taxes imposed by sections
eleven hundred five and eleven hundred ten of this article....
Section 1110 of the Tax Law provides, in relevant part:
(a) Except to the extent that property or services have already
been or will be subject to the sales tax under this article, there
is hereby imposed on every person a use tax for the use within this
state ... (A) of any tangible personal property purchased at retail,
(B) of any tangible personal property (other than computer software
used by the author or other creator) manufactured, processed or
assembled by the user, (i) if items of the same kind of tangible
personal property are offered for sale by him in the regular course
of business or (ii) if items are used as such or incorporated into
a structure, building or real property by a contractor,
subcontractor, or repairman in erecting structures or buildings, or
building on, or otherwise adding to, altering, improving,
maintaining, servicing
or repairing real property, property or
land, as the terms real property, property or land are defined in
the real property tax law, if items of the same kind are not offered
for sale as such by such contractor, subcontractor or repairman or
other user in the regular course of business, (C) of any of the
services described in paragraphs (1), (7) and (8) of subdivision (c)
of section eleven hundred five, (D) of any tangible personal
property ... not acquired for purposes of resale, upon which any of
the services described in paragraphs (2), (3) and (7) of subdivision
(c) of section eleven hundred five have been performed ....
Section 1115(a)(28) of the Tax Law provides:
Computer software designed and developed by the author or creator to
the specifications of a specific purchaser which is transferred
directly or indirectly to a corporation which is a member of an
affiliated group of corporations within the meaning of subparagraph
six of paragraph (b) of subdivision seventeen of section two hundred
eight of this chapter except for clauses (ii) and (iii) of such
subparagraph that includes such purchaser, or to a partnership in
which such purchaser and other members of such affiliated group have
at least a fifty percent capital or profits interest (but only if
the transfer is not in pursuance of a plan having as its principal
purpose the avoidance or evasion of tax under this article), but in
no case including computer software which is pre-written, as defined

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in paragraph six of subdivision (b) of section eleven hundred one of
this article and available to be sold to customers in the ordinary
course of the seller’s business.
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section eleven
hundred five or under section eleven hundred ten shall be exempt
from tax under this article where performed on computer software of
any nature; provided, however, that where
such services are
provided to a customer in conjunction with the sale of tangible
personal property any charge for such services shall be exempt only
when such charge is reasonable and separately stated on an invoice
or other statement of the price given to the purchaser.
Section 1116(a) of the Tax Law provides, in relevant part:
... any sale ... by or to any of the following or any use ... by any
of the following shall not be subject to the sales and compensating
use taxes imposed under this article;
(1)
The State of New York, or any of its agencies,
instrumentalities, public corporations ... or political subdivisions
where it is the purchaser, user or consumer, or where it is a vendor
of services or property of a kind not ordinarily sold by private
persons....
Section 526.6(c) of the New York State Sales and Use Tax Regulations
provides, in relevant part:
(1)
Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to
sell . . . . the property or services which he has purchased will be
considered as purchased for resale, and therefore not subject to tax
until he has transferred the property to his customer.
(2)
A sale for resale will be recognized only if the vendor
receives a properly completed resale certificate
(3) Receipts from the sale of property purchased under a resale
certificate are not subject to tax at the time of purchase by the
person who will resell the property. The receipts are subject to
tax at the time of the retail sale.
*
(8)

*

*

The resale exclusion also applies to a sale of service.
Example 12: A jeweler sends a customer's watch to a repairman

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for servicing.
The charge by the jeweler to the customer is
taxable. The charge to the jeweler by the repairman is not taxable
because the service was purchased for resale by the jeweler.
Section 526.7(a) of the New York State Sales and Use Tax Regulations
provides, in relevant part:
(1) The words sale, selling or purchase mean any transaction in
which there is a transfer of title or possession, or both, of
tangible personal property for a consideration.
(2) Among the transactions included in the words sale, selling, or
purchase are exchanges, barters, rentals, leases or licenses to use
or consume tangible personal property.
Section 526.7(c)(2) of the New York State Sales and Use Tax Regulations
provides, in relevant part:
Where a lease ... with an option to purchase has been entered into,
and the option is exercised, the tax will be payable on the
consideration given when the option is exercised, in addition to the
taxes paid or payable on each lease payment.
Section 526.8(c) of the New York State Sales and Use Tax Regulations
provides, in relevant part:
Tangible personal property does not include:
(1)

real property; ....

Section 529.2(a) of the New York State Sales and Use Tax Regulations
provides, in relevant part:
*

*

*

(2)
A public corporation as used in this section means any
corporation created by an act of the Legislature for a public
purpose ...
Example: ... Industrial Development Agencies are public corporations
and may purchase tangible personal property exempt from the sales
and use taxes.
Section 541.3(a) of the New York State Sales and Use Tax Regulations
provides, in relevant part:
When a contractor's customer is a governmental entity described in
section 1116(a)(1) ... of the Tax Law, the contract signed by the
government representative and the prime contractor is sufficient
proof of the exempt status of purchases made for such contract.

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(1)

Such governmental entities include:

(i) Pursuant to section 1116(a)(1) of the Tax Law the State
of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to
agreement or compact with another state or Canada), or political
subdivisions. This group includes, but is not limited to:
*

*

*

(c) industrial development authorities.
Section 858 of the General Municipal Law provides, in relevant part:
... [E]ach agency shall have the following powers:
*

*

*

(3)
To acquire, hold and dispose of personal property for its
corporate purposes;
*

*

*

(10) To acquire, construct, reconstruct, lease, improve, maintain,
equip or furnish one or more projects; ...
Section 862(2) of the General Municipal Law provides as follows:
(2)(a) Except as provided in paragraph (b) of this subdivision, no
financial assistance of the agency shall be provided in respect of
any project where facilities or property that are primarily used in
making retail sales to customers who personally visit such
facilities constitute more than one-third of the total project cost.
For the purposes of this article, retail sales shall mean: (i) sales
by a registered vendor under article twenty-eight of the tax law
primarily engaged in the retail sale of tangible personal property,
as defined in subparagraph (i) of paragraph four of subdivision (b)
of section eleven hundred one of the tax law; or (ii) sales of a
service to such customers.
Except, however, that tourism
destination projects and projects operated by not-for-profit
corporations shall not be prohibited by this subdivision. For the
purpose of this paragraph, "tourism destination" shall mean a
location or facility which is likely to attract a significant number
of visitors from outside the economic development region as
established by section two hundred thirty of the economic
development law, in which the project is located.
(b)
Notwithstanding the provisions of paragraph (a) of this
subdivision, financial assistance may, however, be provided to a
project where facilities or property that are primarily used in
making retail sales of goods or services to customers who personally
visit such facilities to obtain such goods or services constitute

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more than one-third of the total project cost, where (i) the project
occupant would, but for the assistance provided by the agency,
locate the related jobs outside the state, or (ii) the predominant
purpose of the project would be to make available goods or services
which would not, but for the project, be reasonably accessible to
the residents of the city, town, or village within which the
proposed project would be located because of a lack of reasonably
accessible retail trade facilities offering such goods or services,
or (iii) the project is located in a highly distressed area.
(c) With respect to projects authorized pursuant to paragraph (b)
of this subdivision, no project shall be approved unless the agency
shall find after the public hearing required by section eight
hundred fifty-nine of this chapter that undertaking the project will
serve the public purposes of this article by preserving permanent,
private sector jobs or increasing the overall number of permanent,
private sector jobs in the state. Where the agency makes such a
finding, prior to providing financial assistance to the project by
the agency, the chief executive officer of the municipality for
whose benefit the agency was created shall confirm the proposed
action of the agency.
Section 874(1) and (2) of the General Municipal Law provides as follows:
(1) It is hereby determined that the creation of the agency and the
carrying out of its corporate purposes is in all respects for the
benefit of the people of the state of New York and is a public
purpose, and the agency shall be regarded as performing a
governmental function in the exercise of the powers conferred upon
it by this title and shall be required to pay no taxes or
assessments upon any of the property acquired by it or under its
jurisdiction or control or supervision or upon its activities.
(2) Any bonds or notes issued pursuant to this title, together with
the income therefrom, as well as the property of the agency, shall
be exempt from taxation, except for transfer and estate taxes.
Section 917 of the General Municipal Law establishes the New York City
Industrial Development Agency as an industrial development agency in general
having the powers of industrial development agencies under Article 18-A of the
General Municipal Law.
In Wegmans Food Markets v. Department of Taxation and Finance of the State
of N.Y. (Sup. Ct., Monroe County, Jan. 10, 1992, Galloway, J.) ("Wegmans II"),
the issues presented concerned generally the scope and applicability of the tax
exemption established by section 874 of the General Municipal Law, and more
specifically, whether that tax exemption applied to operational expenses incurred
by plaintiff in the day-today operation of several projects in western New York
State developed as its supermarkets. Those markets were constructed and equipped
under agreements made with various industrial development agencies pursuant to
Article 18-A of the General Municipal Law, and accordingly their construction was
financed by industrial development bonds ("IDBs") issued by the various

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industrial development agencies. The projects were technically owned by the
respective agencies as security for the bonds, but were under "lease back"
arrangements with the plaintiff. In an earlier action, Wegmans Food Markets v.
Department of Taxation and Finance, 126 Misc.2d 144, aff'd, 115 AD2d 962, lv to
app den 67 NY2d 606 (1986)("Wegmans I"), the section 874 tax exemption was held
to be broader than the exemption provided by section 1116 of the Tax Law. The
court in Wegmans II stated in part:
The IDAs are not authorized to engage in supermarket businesses, or
any other businesses per se. Their functions are limited to the
acquisition, construction, reconstruction, leasing, improving,
maintaining, equipping, and furnishing of projects as security for
the repayment of industrial development bonds, in the nature of a
mortgage. Although there is a project lease arrangement between an
IDA and the private developer, it is a financing lease with the
"rent" paid thereunder consisting only of amortized costs and
expenses related to the project financing and the IDBS. The IDAs do
not pay the costs of utilities or other operational expenses; nor do
the leases suggest that the "rent" has been adjusted so as to
account for the developer's payment of operational expenses. The
lease is simply a financing tool, designed to secure tax exempt
IDBs, which are part of an overall plan benefitting, financially,
the private developer and IDB purchasers. Of course, if IDAs are
not authorized to operate a business then it would have no authority
to designate agents to do that which they could not do themselves.
Although some of the numerous expenses listed by plaintiff in their
[sic] complaint may be exempt (such as expenses necessary to
preserve or repair project property), not all of the claimed expense
would be exempt. Many of these expenses bear no relationship to the
purchase, repair or replacement of project property per se but
instead represent costs of supermarket business operations ....
Because all the expenses involved in this action do not have the
same relationship to the IDA's ownership of the project and
authorized functions under the financing scheme, the expenses must
be individually examined to determine what, if any, relationship
each bears to the authorized and lawful functions of an IDA,
particularly the "maintenance" function.
The exemption shall be
applicable only to those expenses properly within such function and
authority.
In this regard, it should be noted that tax-exempt
maintenance would be that needed to maintain the structural
integrity of the structures constructed or rehabilitated to house
the various supermarkets, or to repair equipment used as part of the
project.
The use of utilities and washing of windows and other such operating
expenses have nothing to do with the underlying financial scheme and
should not be tax-exempt under the law. If one business is able to
operate indefinitely without paying taxes on its operating expenses
simply because at one time it structures were financed with IDBs,
that business would have an apparently unintended, open-ended

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economic advantage over competitors, thereby flying in the face of
the fundamental purpose of the law -- i.e., the development of
economically sound commerce.
This decision is not inconsistent with (Wegmans I (supra)), where
the tax exemption of section 874 was held applicable to the purchase
of tangible personal property acquired and owned by the IDA, as
security for the IDBs. Ownership of property, real and personal -­
as distinguished from operation of the business -- was clearly
within the express, contemplated function and authority of IDAs
under the General Municipal Law.
In ("Wegmans I"), the Court stated:
The Legislature very carefully included all revenues received by an
IDA within the purposes of Article 18-A [the New York State
Industrial Development Agency Act]. The definition of "revenues" in
subdivision (7) of section 854 of the General Municipal Law is all
inclusive: "All rents, revenues, fees, charges and other sources of
income derived by the agency from the leasing, sale or other
disposition of a project or projects."
The term "projects" was also made all-embracing. Subdivision (4) of
section 854 of the General Municipal Law defines "Project[s]" as
"any land, and building[s] or other improvement, and all real and
personal properties located within the state of New York ...
including, but not limited to, machinery, equipment and other
facilities deemed necessary or desirable in connection therewith, or
incidental thereto ... which shall be suitable for manufacturing,
warehousing, research, commercial or industrial purposes" ....
Opinion
Based on the structure under which the IDA proposes to make sales and
compensating use tax benefits available to "PWG" with respect to "Tenant
Improvements", "Project Personalty" and "Maintenance Contracts", as described by
"PWG" in its petition, and in accordance with the sections of law and regulations
cited above and the decisions in Wegmans Food Markets v. Department of Taxation
and Finance (126 Misc 2d 144, aff'd 115 AD2d 962, lv to app den 67 NY2d 606) and
Wegmans Food Markets v. The Department of Taxation and Finance of the State of
N.Y. (Sup Ct, Monroe County, Jan. 10, 1992, Galloway, J.)supra, and provided that
all the terms and conditions of the relevant documents are complied with, and
that these terms and conditions are consistent with "PWG's" description of them
as set forth above, in the instant matter:
(1) In the case where "Tenant Improvements" constitute capital improvements, as
defined in section 1101(b)(9) of the Tax Law, payments for these capital
improvements will not be subject to sales and use tax imposed under sections
1105, 1107, 1109 and 1110 of the Tax Law.
But if "PWG" or an "Affiliate"
purchases materials used to construct capital improvements, "PWG's" or the
"Affiliate's" purchase would generally be subject to tax (see section 1101(b)(4)
of the Tax Law), unless otherwise exempt. However, purchases of materials to be

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incorporated into such "Tenant Improvements" at the "Project Premises" by "Maiden
Lane", "PWG", "PWI" or "Affiliate" of "PWG" which has been appointed as agent of
the IDA, acting on behalf of and as agent of the IDA, pursuant to the Project
Agreement, will be exempt from the taxes imposed under sections 1105, 1107, 1109
and 1110 of the Tax Law, provided that (i) the IDA is the owner, lessor or lessee
of the property, (ii) any purchase invoices, statements and contracts with
vendors and suppliers provide that the IDA is the purchaser, lessor or lessee and
(iii) such purchaser is the disclosed agent of the IDA.
In the case where "Tenant Improvements" do not constitute a capital
improvement under section 1101(b)(9) of the Tax Law, payments for such "Tenant
Improvements" which do not constitute capital improvements will be exempt from
such taxes only if the purchaser is the disclosed agent of the IDA, as provided
above. Thus, payments to purchase "Tenant Improvements" which do not constitute
capital improvements will be exempt from such taxes only where one of the persons
specified above makes purchases as agent of and on behalf of the IDA.
Purchases (including leases) of "Project Personalty" (including "Computer
Software") by "Maiden Lane", "PWG", "PWI" or "Affiliate" of "PWG" which has been
appointed as agent of the IDA, acting on behalf of and as agent of the IDA,
pursuant to the Project Agreement, will be exempt from the taxes imposed under
sections 1105, 1107, 1109 and 1110 of the Tax Law provided that (i) the IDA is
the owner, lessor or lessee of the equipment, (ii) any purchase invoices,
statements and contracts with vendors and suppliers provide that the IDA is the
purchaser or lessee and (iii) "Maiden Lane", "PWG", "PWI" or "Affiliate" of "PWG"
which has been appointed as agent of the IDA is the disclosed agent of the IDA.
(2) Payments under the leases of the "Tenant Improvements" and "Project
Personalty" from the IDA to "Maiden Lane", and from "Maiden Lane" back to the
IDA, will not be subject to the taxes imposed under sections 1105, 1107, 1109 and
1110 of the Tax Law.
(3) Payments by "PWI" and its "Affiliates" to the IDA under the "Operating
Lease" of the "Tenant Improvements" and "Project Personalty" from the IDA to
"PWI" and its "Affiliates" will not be subject to the taxes imposed under
sections 1105, 1107, 1109 and 1110 of the Tax Law.
(4) Payments made to vendors by "Maiden Lane", "PWG" or "PWI", on behalf
of and as agent of the IDA, under the "Maintenance Contracts", for purchases of
(1) the services of maintaining, servicing, installing and repairing tangible
personal property, consisting of "Project Personalty", with a useful life of one
year or more, which is in use at the "Project Premises", including replacement
parts, but not including parts (e.g., a toner cartridge) that contain materials
or substances consumed in operating the property and that are replaced when the
part, material or substance is consumed, but not including contracts for general
services (e.g., janitorial services), or (2) for the services of maintaining,
servicing and repairing the "Tenant Improvements", will be exempt from sales and
use taxes, to the extent that (1) the "Maintenance Contracts", services and
parts, with respect to "Project Personalty", are necessary to maintain, repair,
install or service such "Project Personalty" used as part of the "Project", and
provided that the IDA is the owner, lessor or lessee of such "Project
Personalty", or (2) the "Maintenance Contracts", services and tangible personal

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property, with respect to "Tenant Improvements", are necessary to maintain the
structural integrity of the "Tenant Improvements", and provided that the IDA is
the owner, lessor or lessee of such "Tenant Improvements", and also provided that
the purchase invoices, statements and contracts with vendors and suppliers for
services described in preceding clauses (1) and (2) provide that the IDA is the
purchaser, lessor or lessee with respect to "Project Personalty" and "Tenant
Improvements", and also that the person making the payments is the disclosed
agent of the IDA. In any instance where the maintenance, servicing, installation
or repair service results in the replacement of parts, materials or supplies that
are consumed in the ongoing operation of the "Project Personalty" or "Tenant
Improvements" where such parts, materials or supplies must be replaced when
consumed, the portion of the charges applicable to such parts, materials or
supplies will be subject to sales and use taxes, as indicated in Wegmans Food
Markets v. The Department of Taxation and Finance of the State of N.Y. (Sup. Ct.,
Monroe County, Jan.10, 1992, Galloway, J.) supra. The purchase and use of fuels
and energy and utility services are not tax-exempt. Id.
Enhancements,
modifications and upgrades to computer software, to the extent that they may
constitute services described in section 1105(c) of the Tax Law, are exempt from
the taxes imposed by sections 1105, 1107, 1109 and 1110 of the Tax Law pursuant
to section 1115(o) of the Tax Law, provided that, however, where such services
are provided to a customer in conjunction with the sale of tangible personal
property, any charge for such services shall be exempt only when such charge is
reasonable and separately stated on an invoice or other statement of the price
given to the purchaser.
However, it is noted that in a transaction where the charge is for both
taxable maintenance and repair services and qualifying exempt services under a
"Maintenance Contract", the total charge will be subject to sales and use taxes,
unless the portion of the charge applicable to the qualifying exempt services
under the "Maintenance Contract" is separately stated from the other charges or
otherwise reasonably allocated.
(5) Payments under the "Financing Lease" of the "Tenant Improvements" and
"Project Personalty" from the IDA to "Maiden Lane", and from "Maiden Lane" back
to the IDA, to the extent allocable to the services provided under the
"Maintenance Contracts", will not be subject to the taxes imposed under sections
1105, 1107, 1109 and 1110 of the Tax Law.
(6) Payments under the "Operating Lease" of the "Tenant Improvements" and
"Project Personalty" from the IDA to "PWI" and its "Affiliates", to the extent
allocable to the services under the "Maintenance Contracts", will not be subject
to the taxes imposed under sections 1105, 1107, 1109 and 1110 of the Tax Law.

DATED:

May 22, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.